๐ต #StablecoinMechanisms101: How stablecoins maintain stable value.
Stablecoins are essential in the crypto world โ but not all work the same way.
๐ What is a stablecoin?
๐น A token that seeks to maintain parity with a stable currency, such as the dollar
๐น Used for protection against volatility, liquidity, and fast transfers
๐ก Main stability mechanisms:
1. Fiat-collateralized (centralized)
๐ธ Ex: USDT, USDC, BUSD
๐น Backed by real dollar reserves
โ๏ธ More stable
โ Depend on centralized institutions
2. Crypto-collateralized (decentralized)
๐ธ Ex: DAI
๐น Backed by ETH, BTC, and other crypto assets
โ๏ธ On-chain transparency
โ Liquidation risk during severe drops
3. Algorithmic (experiments)
๐ธ Ex: Frax, (and the failed case of UST)
๐น Control supply and demand with algorithms
โ๏ธ Do not require large reserves
โ High instability โ risk of collapse
โ ๏ธ Not every stablecoin is "truly" stable.
Always research the mechanism behind it before using.
โก๏ธ Understanding how a stablecoin works is the first step to using it with confidence.
#StablecoinMechanisms101 #DeFiSeguro #Web3ParaTodos